Foreign Exchange And Foreign Currency

The Foreign Exchange market ("Forex"), is the largest financial market in the world, the daily average turnover of which reaches US$1.2 trillion. The main essence of Foreign Exchange is the simultaneous buying of one currency and selling of another (world 's currencies are on a floating exchange rate and are always traded in pairs, e.g. Euro/Dollar or Dollar/Yen).

Exchange rates play a pivotal role in the relationships between individual economies and the global economy. Almost all financial flows are processed through the exchange rate, as a result the movements and fluctuations of the exchange have a significant impact on international competitiveness, trade flows, investment decisions and many other factors within the economy. Due to the increasing globalisation of the world economy, trade and financial flows are becoming more accessible

Exchange rate as the relative price of 2 countries’ currency, it could have effects on both countries’ exports and imports. Fluctuations in exchange rate would increase the risk of uncertainty for business gain and loss. The appreciation of home country’s currency will lead products of home country are less competitive due to its price is actually higher in foreign country although there is no price increase from home country. And depreciation of home country’s currency will lead home country’s products are more competitive in international market. However, it could increase the possibility of anti-dumping investigations from foreign country against home country.

Foreign exchange rate determines the price exchange of two currencies. Changes in these rates affects the amount of goods and services import and export of a country. When a country currency is stronger, it is now exchanged for more goods than before, and once the currency is weaker, less of goods are purchased for the same amount of the currency. Financial institutions use the exchange rates changes to decide whether to buy/sell financial assets such as bonds, stocks, etc. That means, they will buy and sell foreign assets to gain profit. The value of these assets increases or decreases as the exchange rates change. If the dollar

There are various factors that influence the exchange rate of a currency, such as: interest rates, current account balance, unemployment rate, gross domestic product, expectations on inflation rate, import and export capability of country, trade relationship of two countries, relative product price etc. In basic understanding these factors affect either demand or supply of currency and therefore exchange rate of currency. For example, if government of China determines the higher interest than USA then demand for Yuan in USA increases because foreign capital in china will increase due to potential higher rate of return on investment and by the law of supply and demand rate of Yuan too rises. Another example is China’s huge export amount which pushes the demand of Yuan in it’s trading partner nations, which is virtually all the world, subsequently leading to higher exchange rate.

Like stated previously, each factor has its own respected relationship to the exchange rate within the global market. But a large influence is in part to how much a currency is worth is correlated to how much value that currency is backed by the local government. Physical cash has to be supported by goods and/or gold for the currency to be worth anything. This value comes from a balance with in accounts and controlled government spending. The current account is the balance of trade between a country and the trading market, based off of all payments between other countries for goods and services. Any deficit in the current account shows if there is more being spent on imports products than being earned by exporting its own goods. These deficits in turn force countries to borrow capital from foreign sources to make up for this difference to keep the balance. “This excess demand for foreign currency lowers the country 's exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests.” (Van Bergen)

When the fixed exchange rate is used there is no automatic mechanism of economy adjustments in case of crisis. Then the government have to use its reserves in order to protect its currency. If the crisis is profound the reserves can be insufficient to support the currency and maintain the balance. It can lead to depression or deflation. In some cases devaluation of the currency would be necessary.

One prominent criticism of adopting a peg exchange rate regime is the loss of control over monetary policy. The simultaneous combination of a fixed exchange rate regime and open capital markets with an independent monetary policy constitutes the Impossible Trinity. If the exchange rate is pegged and capital is mobile, then the domestic nominal interest rate must equal the foreign nominal interest rate. Lack of effective local monetary policy is harmful, especially when a country is hit by domestic shocks which are not correlated with business cycles in the anchor country. A domestic monetary policy is a plus, but the existence of an independent monetary policy does not guarantee its proper performance. Developing countries usually do

In today’s economy, forex rate, the price of one currency in terms of another, has considerably contributed to the economic status of many countries all over the world. It is considered as one of the factors that identifies and emphasizes the welfare of a country; specifically, the welfare of its residents. With forex rate, a country can be provided with knowledge that may help them in different situations of interests. (Wright, n.d.)

Exchange rate measures the value of one country’s currency through another country’s currency, so it acts a significant role in international trade, by which I mean a wide range term, not only infers import and export trade, but also includes offshore financial transaction and futures trading, even transactions in foreign travel. Therefore, exchange rate policy is an important part of a country’s policy, affecting both domestic economy and foreign relation.

Fluctuations in the value of foreign currency impose a direct cost on foreign airlines as crude oil is purchased in accordance with the US dollar to which it is pegged. Airline companies in North America, which are associated with the SPDR S&P Transportation ETF, benefit from the fact that crude oil prices are denominated in U.S. dollars; as opposed to airlines from other regions that are susceptible to fluctuations in the exchange rate as well as the overall price of crude oil per barrel. For example, Brazilian airline Gol Linhas Aéreas Inteligentes’s fuel costs accounted for 42% of its operating costs, in comparison to its US rivals such as American Airlines and Delta Airlines. (IATA, 2015)

"If you want to know the value of money, go and try to borrow some." This quote by Benjamin Franklin seems to have laid a foundation for several financial concepts and practices. International trade and domestic monetary policy of a country are closely connected to each other. A financial incentive can increase export opportunities for trading partners whereas foreign exchange controls for balance of payments can inhibit exports. Intervention of the Apex bank in foreign exchange markets may fuel exports and impede imports or vice-versa, subject to the direction of manipulation.

As mentioned before, there is no universal solution to the monetary policy governing exchange rates. A general rule, however, is that floating exchange rates provide a country with more adaptability and independence in fluctuating international economic circumstances. But they can lead to instability, needlessly expansionary policy and excessive speculation. Fixed exchange rates, in contrast, are

This means that one of the most important factor for exchange rates movement is the different inflation rates between countries, because high prices make a country’s good uncompetitive, the appreciation or depreciation of such currency could in theory restore the balance.

Effectively, what happens is when countries want to import goods, they either have to directly barter those for their own exports, or first buy currency from the exporting country with which to purchase the exports. Exporting countries often want payment in their own currency, so if the purchasing country has a reserve of the foreign